Rio Tinto says WA reopening may mean rough ride for iron ore industry

Rio Tinto says the opening of Western Australia’s borders means the spread of the omicron virus could outpace the return of skilled labour from the eastern states.

Health protections given to Australia’s most lucrative export industry by WA’s hard border will cease on February 5 when travel restrictions into the state will be relaxed, giving the sector better access to east coast labour but also allowing the virus to spread into an already stretched workforce.

Rio iron ore boss Simon Trott said skilled workers on the east coast and overseas were unlikely to return to the WA industry in large numbers immediately, compounding staff shortages that have been exacerbated by mandatory vaccination rules.

That means miners could initially feel the sharper side of the double-edged sword that WA’s harder borders have been over the past two years.

“I think it is going to be a really challenging first half of the year,” Mr Trott said on Tuesday.

“It takes time for some of that labour to come back when it has been unable to move. I don’t think you will see on February 6 the planes arriving and it all goes back to where it was, it is going to progress slowly.

“It is not going to be a flick of the switch and it’s all back to how it was”.

Close to 2 per cent workers in Rio’s iron ore business quit over a WA government rule that enforced double vaccination for resources industry workers before January 1.

 Those departures exacerbated staff turnover rates that have recently run close to 10 per cent in Rio’s iron ore division, which is the biggest exporter of Australian iron ore.

 When combined with pandemic-related supply chain disruptions, a greater focus on preservation of Aboriginal heritage and weather disruptions, the labour shortages led to Rio’s weakest annual iron ore export result since 2015.

 The second-biggest exporter of Australian iron ore, BHP, will clarify on Wednesday morning whether it too suffered a sequential decline in export volumes during the 2021 calendar year.

 Delivery of $US4 billion worth of new Rio iron ore mines was also delayed by those factors.

 Travel restrictions prevented Rio from doing quality tests on the steel and equipment sent to WA to help complete construction of the new mines, forcing Rio to send some components back for repair, triggering further delays.

 Cautious growth target

“We are seeing tightness in supply chains across the board. Delivery takes longer, sourcing takes longer, suppliers don’t have some of the kit they need to have,” Mr Trott said.

 “We are doing a lot of work on it, preparing the business and making sure we have good stock levels as it is something that is going to be with us for some time.”

 The comments came as Rio set a cautious target for iron ore export growth in 2022, with the miner vowing to ship between 320 million and 335 million tonnes from WA.

While the target implies export volumes will probably rise above the 321.6 million tonnes shipped in 2021, it remains below the 338 million tonnes Rio shipped in 2018.

The target was also more conservative than this time last year when Rio said it might be capable of shipping up to 340 million tonnes in 2021.

Investors might be disappointed

Rio’s export target for 2022 also came with significant caveats.

“Our guidance assumes development of the pandemic does not lead to government-imposed restrictions and widespread protracted cases related to new highly contagious variants with high severity,” Rio said in a market filing.

Morgans analyst Adrian Prendergast said the 2022 export target was softer than he expected and may disappoint some investors.

Rio has in recent years run charter flights between some rural parts of WA and the iron ore mines in the Pilbara in a bid to find extra workers, with one such service connecting Busselton near the Margaret River wine region to the Pilbara.

Mr Trott said Rio would consider similar tactics on the east coast once the WA border was relaxed.

“Running direct charter flights into areas on the east coast, whether it’s cities or into some of the regions, is certainly something we are looking to progress, and we have done that very successfully here in WA,” he said.

“It gives people the freedom to live where they want to live and have the sort of lifestyle they want and that is something we are certainly looking at for the east coast.

“We will look at the best strategies to make it as easy as possible for people and to ensure we are a place where people really want to come to work.”

Rio signalled it was making progress on rebuilding relations with traditional owner groups in the iron-rich Pilbara region of WA that were damaged by Rio’s destruction of 46,000-year-old Aboriginal heritage at Juukan Gorge in May 2020.

Rio said its relationship with the Puutu Kunti Kurrama and Pinikura (PKKP) traditional owners of Juukan Gorge was “constructive and considered” at the end of 2021 and that a compensation deal for Juukan Gorge was close to being struck.

“An agreement on a co-management of country approach and an appropriate remedy for the destruction of Juukan Gorge is substantially progressed,” said Rio on Tuesday.

The “benchmark” price for ore with 62 per cent iron content was $US124 a tonne on January 17, according to S&P Global Platts.

But Rio shipped higher volumes of iron ore that did not meet the “benchmark” standard in 2021 as ageing mines extracted marginal geology.

Volumes of lower-quality “SP-10” ore more than tripled from 9.8 million tonnes in 2020 to 36.6 million tonnes.

The new generation of Rio mines in WA will help improve Rio’s product quality and reduce the proportion of “SP-10” in the miner’s product mix, but it plans to continue selling SP-10 permanently.

Iron ore was not the only Rio division to suffer a weak year; volumes slumped by 7 per cent in copper, 1 per cent in aluminium, 3 per cent in bauxite and 9 per cent in titanium dioxide.

Aside from the pandemic, those declines were caused by a mix of labour disputes, weather and social unrest in South Africa.

Slow progress on government permission for Rio’s Jadar lithium project in Serbia means first production has been pushed back to 2027 at the earliest, rather than 2026.